On 14th November 2014, the Financial Conduct Authority  (FCA – formerly known as Financial Conduct Authority) published a new report on how small banks manage money laundering and sanctions risk. The report follows up the previous review on Bank’s management of high money-laundering risk situations (AML review) carried out by the Fincial Services Authority (FSA) in 2011.

Although the FCA was pleased to find that some retail, wholesale, and private banks had implemented effective AML/sanctions controls, with private banks generally operating to higher standards, the Authority was disappointed to find continuing weaknesses in most small banks’ AML systems and controls.

In particular, the FCA noted the following:

Positive Results

Some banks demonstrated:

• good senior management engagement on AML,
• a good understanding of financial crime risk among key staff,
• close oversight of high risk customer relationships, and
• an effective use of enhanced due diligence (EDD) as a basis for identifying potentially suspicious activity.

Therefore, the FCA concluded that such positive examples show it is possible and achievable for small banks to manage their business in line with legal and regulatory AML requirements.

Negative Results

• Most of the small banks showed significant and widespread weaknesses in key AML controls, including AML risk assessments at both a business and customer level, and EDD and on-going-monitoring of high risk, PEP, and correspondent relationships;
• A third of banks had inadequate AML resources, and staff knowledge and awareness of AML and sanctions risks were often weak. This included – in a quarter of banks – MLROs.
• Overseas banks faced particular AML challanges when they relied on other parts of the Group to carry out CDD on their behalf. This was because Group policies and procedures were not always consistent with UK legal and regulatory requirements.
• Slow banks’ assessment of their AML systems and controls against the FCA’s guidance (AML review -2011) – Three quarters of the banks visited had only taken action to improve their systems and controls since late 2012, often in response to enforcement action against other banks with similar business models.
• Although most banks had an adequate understanding of their obligations under the UK sanctions regime, some had weaknesses in relevant controls. In particular, some banks had decided to exclude certain transaction types from payment screening without first assessing the risk posed.

As a result of the above shortcomings, the FCA has taken the following actions in respect of six banks which were found with serious weaknesses :

• Four banks voluntarily agreed to limit their business activities with certain types of high risk customers until they have corrected control weaknesses.
• FCA required three of these banks to appoint a skilled person under s.166 of the Financial Services and Markets Act 2000. The FCA used this tool mainly where it had previously told banks about weaknesses in their AML controls and they had failed to make adequate improvements. The other three banks are conducting remedial work under the guidance of external consultants.
• FCA has started Enforcement investigations into two of the six banks.

Source: FCA (for further information and download the FCA’s review, please click here